Opinion: Prices rising in a weak economy: Your home is the problem, fuelling stagflation - The Globe and Mail | Canada News Media
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Opinion: Prices rising in a weak economy: Your home is the problem, fuelling stagflation – The Globe and Mail

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A person walks past multiple for-sale and sold real estate signs in Mississauga, Ont., on May 24.Nathan Denette/The Canadian Press

John Rapley is a political economist at the University of Cambridge and the managing director of Seaford Macro.

When the Bank of Canada decided last month to hold off on further interest-rate rises, many breathed a sigh of relief. In Canada, as indeed in all G7 economies just now, expectations are growing that the worst of the inflation surge has passed.

Some have gone so far as to declare victory in the inflation debate for ”team transitory,” saying inflation was only ever going to be temporary. In fact, to judge from action in bond markets, investors are now betting that rate cuts will start as early as next year. Cue the blog posts that the Roaring Twenties are now back on track.

But the celebrations may be premature. Buried in the notes of last month’s BoC meeting was concern about the impact of Canada’s housing crisis on inflation. While the big increases in mortgage rates should have knocked prices down by now, the bank noted that “the ongoing structural shortage of housing supply in the economy was sustaining elevated house prices.” Owing to this, even though a majority of governors voted to hold rates constant, some favoured a further hike.

Because until Canada brings real estate prices down further, not only will the housing crisis endure, but the economy will probably continue to struggle with a stagflation problem, with prices rising in a weak economy.

The BoC is not the only central bank warning it’s too early to declare victory in the war on inflation. U.S. Federal Reserve governors have been making similar noises, while earlier this week, amid rallying bond markets, Bank of England Governor Andrew Bailey warned that it was “far too early to be thinking about rate cuts.” And scarcely anyone would say that housing prices in Canada are anything healthy for the wider economy.

It’s a bit puzzling that the macroeconomic effects of real estate prices have received so little attention until now. It stands to reason that if the prices of real estate rise, businesses will face pressure to raise costs to cover high rents, and workers will seek higher pay to be able to cover their increased living costs. Indeed, evidence from the U.S. suggests that over time, when the value of real estate has risen relative to other assets, inflation tends to follow. Equally, growth then slows, resulting in the sort of stagflation we have seen of late.

What lessons might Canada infer from the American experience of how to break free from this trap? Since the 2008 financial crisis, the Canadian and U.S. economies have gone onto different paths. Whereas Canada’s per capita GDP had previously tracked its southern neighbour, since 2008 it’s been falling behind.

It may just be that real estate explains the divergence. One significant impact of the 2008 crash was that the value of real estate relative to other assets stopped rising south of the border. Not so in Canada, where real estate took off. Even though many Canadians might not want to hear it, the key lesson from the U.S. may be that if you want to restore economic growth, you need to puncture the housing bubble – and puncture it big time.

Canadian house prices have now stopped rising and begun falling from their peak. But south of their border, real estate prices fell a fifth from their 2007 peak, and in real terms didn’t recover for more than a decade. Canada probably has a way to go yet, and the faith that real estate prices should resume rising soon is probably misplaced.

Moreover, there’s only so much the Bank of Canada can do about this, given the structural conditions underpinning real estate prices. The bank can choke off demand by raising mortgage costs. But it can’t do much to boost supply, which means prices could bounce back quickly if it lowers rates – as happened earlier this year when it paused its rate rises and real estate markets turned briefly upward again.

One of the unusual features of the real estate market is that it tolerates a much higher degree of anti-competitive behaviour than is allowed in other markets. Frequent though the complaints may be that Canada tolerates oligopolies in sectors such as banking, food retail or telecommunications, if a company tries to drive potential rivals out of business with predatory pricing or buyouts and shutdowns, it will likely feel some heat from regulators.

Not so for real estate owners. They can attend a planning meeting to block a new development that will knock down the value of their asset. When combined with zoning restrictions that limit new house supply, it’s understandable the federal Housing Minister would lament that house building is illegal.

Taking all this into consideration, it seems clear that investors looking for a break from high interest costs and the return of rising prices should probably brace themselves for more trouble.

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A timeline of events in the bread price-fixing scandal

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Almost seven years since news broke of an alleged conspiracy to fix the price of packaged bread across Canada, the saga isn’t over: the Competition Bureau continues to investigate the companies that may have been involved, and two class-action lawsuits continue to work their way through the courts.

Here’s a timeline of key events in the bread price-fixing case.

Oct. 31, 2017: The Competition Bureau says it’s investigating allegations of bread price-fixing and that it was granted search warrants in the case. Several grocers confirm they are co-operating in the probe.

Dec. 19, 2017: Loblaw and George Weston say they participated in an “industry-wide price-fixing arrangement” to raise the price of packaged bread. The companies say they have been co-operating in the Competition Bureau’s investigation since March 2015, when they self-reported to the bureau upon discovering anti-competitive behaviour, and are receiving immunity from prosecution. They announce they are offering $25 gift cards to customers amid the ongoing investigation into alleged bread price-fixing.

Jan. 31, 2018: In court documents, the Competition Bureau says at least $1.50 was added to the price of a loaf of bread between about 2001 and 2016.

Dec. 20, 2019: A class-action lawsuit in a Quebec court against multiple grocers and food companies is certified against a number of companies allegedly involved in bread price-fixing, including Loblaw, George Weston, Metro, Sobeys, Walmart Canada, Canada Bread and Giant Tiger (which have all denied involvement, except for Loblaw and George Weston, which later settled with the plaintiffs).

Dec. 31, 2021: A class-action lawsuit in an Ontario court covering all Canadian residents except those in Quebec who bought packaged bread from a company named in the suit is certified against roughly the same group of companies.

June 21, 2023: Bakery giant Canada Bread Co. is fined $50 million after pleading guilty to four counts of price-fixing under the Competition Act as part of the Competition Bureau’s ongoing investigation.

Oct. 25 2023: Canada Bread files a statement of defence in the Ontario class action denying participating in the alleged conspiracy and saying any anti-competitive behaviour it participated in was at the direction and to the benefit of its then-majority owner Maple Leaf Foods, which is not a defendant in the case (neither is its current owner Grupo Bimbo). Maple Leaf calls Canada Bread’s accusations “baseless.”

Dec. 20, 2023: Metro files new documents in the Ontario class action accusing Loblaw and its parent company George Weston of conspiring to implicate it in the alleged scheme, denying involvement. Sobeys has made a similar claim. The two companies deny the allegations.

July 25, 2024: Loblaw and George Weston say they agreed to pay a combined $500 million to settle both the Ontario and Quebec class-action lawsuits. Loblaw’s share of the settlement includes a $96-million credit for the gift cards it gave out years earlier.

Sept. 12, 2024: Canada Bread files new documents in Ontario court as part of the class action, claiming Maple Leaf used it as a “shield” to avoid liability in the alleged scheme. Maple Leaf was a majority shareholder of Canada Bread until 2014, and the company claims it’s liable for any price-fixing activity. Maple Leaf refutes the claims.

This report by The Canadian Press was first published Sept. 19, 2024.

Companies in this story: (TSX:L, TSX:MFI, TSX:MRU, TSX:EMP.A, TSX:WN)

The Canadian Press. All rights reserved.

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S&P/TSX composite up more than 250 points, U.S. stock markets also higher

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TORONTO – Canada’s main stock index was up more than 250 points in late-morning trading, led by strength in the base metal and technology sectors, while U.S. stock markets also charged higher.

The S&P/TSX composite index was up 254.62 points at 23,847.22.

In New York, the Dow Jones industrial average was up 432.77 points at 41,935.87. The S&P 500 index was up 96.38 points at 5,714.64, while the Nasdaq composite was up 486.12 points at 18,059.42.

The Canadian dollar traded for 73.68 cents US compared with 73.58 cents US on Thursday.

The November crude oil contract was up 89 cents at US$70.77 per barrel and the October natural gas contract was down a penny at US2.27 per mmBTU.

The December gold contract was up US$9.40 at US$2,608.00 an ounce and the December copper contract was up four cents at US$4.33 a pound.

This report by The Canadian Press was first published Sept. 19, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Construction wraps on indoor supervised site for people who inhale drugs in Vancouver

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VANCOUVER – Supervised injection sites are saving the lives of drug users everyday, but the same support is not being offered to people who inhale illicit drugs, the head of the BC Centre for Excellence in HIV/AIDS says.

Dr. Julio Montaner said the construction of Vancouver’s first indoor supervised site for people who inhale drugs comes as the percentage of people who die from smoking drugs continues to climb.

The location in the Downtown Eastside at the Hope to Health Research and Innovation Centre was unveiled Wednesday after construction was complete, and Montaner said people could start using the specialized rooms in a matter of weeks after final approvals from the city and federal government.

“If we don’t create mechanisms for these individuals to be able to use safely and engage with the medical system, and generate points of entry into the medical system, we will never be able to solve the problem,” he said.

“Now, I’m not here to tell you that we will fix it tomorrow, but denying it or ignoring it, or throw it under the bus, or under the carpet is no way to fix it, so we need to take proactive action.”

Nearly two-thirds of overdose deaths in British Columbia in 2023 came after smoking illicit drugs, yet only 40 per cent of supervised consumption sites in the province offer a safe place to smoke, often outdoors, in a tent.

The centre has been running a supervised injection site for years which sees more than a thousand people monthly and last month resuscitated five people who were overdosing.

The new facilities offer indoor, individual, negative-pressure rooms that allow fresh air to circulate and can clear out smoke in 30 to 60 seconds while users are monitored by trained nurses.

Advocates calling for more supervised inhalation sites have previously said the rules for setting up sites are overly complicated at a time when the province is facing an overdose crisis.

More than 15,000 people have died of overdoses since the public health emergency was declared in B.C. in April 2016.

Kate Salters, a senior researcher at the centre, said they worked with mechanical and chemical engineers to make sure the site is up to code and abidies by the highest standard of occupational health and safety.

“This is just another tool in our tool box to make sure that we’re offering life-saving services to those who are using drugs,” she said.

Montaner acknowledged the process to get the site up and running took “an inordinate amount of time,” but said the centre worked hard to follow all regulations.

“We feel that doing this right, with appropriate scientific background, in a medically supervised environment, etc, etc, allows us to derive the data that ultimately will be sufficiently convincing for not just our leaders, but also the leaders across the country and across the world, to embrace the strategies that we are trying to develop.” he said.

Montaner said building the facility was possible thanks to a single $4-million donation from a longtime supporter.

Construction finished with less than a week before the launch of the next provincial election campaign and within a year of the next federal election.

Montaner said he is concerned about “some of the things that have been said publicly by some of the political leaders in the province and in the country.”

“We want to bring awareness to the people that this is a serious undertaking. This is a very massive investment, and we need to protect it for the benefit of people who are unfortunately drug dependent.” he said.

This report by The Canadian Press was first published Sept. 18, 2024.

The Canadian Press. All rights reserved.

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